An appraisal of alternative blueprints for international policy coordination

Abstract

This paper examines two schemes for the international coordination of macroeconomic policy using a world econometric model, GEM. The first is the Extended Target Zone scheme proposed by Williamson and Miller, which involves targeting Fundamental Equilibrium Exchange Rates using monetary policy and using fiscal policy to control domestic demand. The second uses fiscal policy to target the current account and monetary policy to stabilise domestic demand. Both schemes are parameterised using optimal control techniques on GEM, and the welfare gains in using these schemes compared to historical experience from 1974 to 1986 are assessed.